Crypto Margin vs Futures Trading: Everything you should know about

INTRODUCTION TO LEVERAGE

Before we get into the intricacies of margin trading and futures trading in cryptos, there is a concept of leverage that we need to learn about first. Leverage essentially means taking a loan from the market or borrowed funds to enter a trade that you otherwise wouldn’t have been able to with the limited cash you have.

Essentially, if you want to purchase, say for example, ₹1000 worth of Ethereum (ETH) with a leverage factor of 5x – that means you can get ₹1000 worth of ETH for a fifth of that value, i.e. ₹200. This is called leverage.

Let’s demonstrate this with an example. Say on any particular day, DOGE is trading at ₹10.

In the spot market, if a trader thinks that the price of DOGE may go up by 10% and the trader has a capital of ₹1000 only.

That means, the trader can only purchase 100 units of DOGE at ₹10. Now if the market does go up by 10%, that means the price of DOGE is now ₹11. The trader now decides to exit his position and after selling off all the DOGE, he is left with ₹1100, thus making a profit of ₹100 in this transaction, which totals about 10% on his capital.

Now say if the trader had access to leverage of, say 5x – that means with the same ₹1000, the trader could have bought ₹5000 worth of DOGE, or about 500 units of DOGE!

Considering, the market went up by the same 10%, the same transaction with the help of a 5x leverage would have made the trader ₹500 instead of only ₹100 as was the case in the spot market – giving the trader a 50% ROI on his ₹1000 capital.

Additional Read: Crypto Investing vs Trading

INTRODUCTION TO MARGIN TRADING

So now that we understand what leverage is, let’s get to margin trading. Margin trading is a solution to amplify returns on the spot trading solution. Spot trading is essentially a system where you pay the entire amount of the crypto you want to buy upfront and then take custody of the crypto asset in exchange. But in margin trading, the funds are borrowed by the trader from the broker to take a speculative trade to earn from the market to profit from volatility and ultimately return the borrowed funds.

Crypto margin trading is one of the ways in which a trader in the crypto market can earn from the market in excess of what the trader might have earned if he or she had taken the trade in the spot market. It is a means by which you can multiple the returns you can make from the market by trading an asset based on its price action. Thus primary difference when compared to spot trading, is that margin trading allows the trader to open a position without having to pay the full amount from their own pocket.

INTRODUCTION TO FUTURES TRADING

Futures trading is a concept where an asset is attached to a derivative contract, with an agreement to buy or sell the specific asset, commodity or asset at a predetermined future date at a predetermined price. Futures contracts, also simple referred to as futures, are traded on futures exchanges and the concept is pretty much the same for the crypto market too.

Futures as a concept was initially built as a hedge for commodity traders who had to buy some stock of a particular commodity, say gold – and ran the risk of the price of the asset depreciating in the future. To safeguard against this, commodity traders bought or sold futures contracts on the markets to hedge themselves against it. However, eventually, futures has become more of a speculative tool that is used by traders because using futures one can buy a larger quantity of a particular asset by paying a lesser amount.

Read more: Spot vs Futures Trading

SIMILARITIES: MARGIN vs FUTURES TRADING

One of the biggest similarities between margin trading and futures trading is that both of these techniques make use of the concept of leverage. Essentially, one has to pay a relatively lesser amount of money to open a position in the market and potentially make returns that are in excess of the returns one would have made in the spot market.

Another is that while spot markets are used by both traders and investors, as you need to pay the full amount upfront to take custody of your assets, on the other hand, both margin and futures markets are largely used by traders to earn speculative income out of the market, as demonstrated in the example stated above.

DIFFERENCES: MARGIN vs FUTURES TRADING

One of the biggest differences between margin trading and futures trading is the market they operate in. Margin trading occurs on the usual exchange, facilitated by brokers while the futures trading occurs over the futures market facilitated by futures exchanges.

Secondly, the difference between margin and futures is in the kind of product they are. Margin is essentially a loan on whatever you want to buy while futures is essentially a contract set for a future date and price that can be speculated upon. Futures contracts are typically fixed quantity items while margin trading quantities aren’t fixed and depend on the funds you actually put in.

Now, because of the fact that futures trading happen in the form of contracts, there is greater liquidity and easy of position entry and exit in the market while closing a position in margin trading may be more difficult when liquidity is out of the market.

And finally, another difference in these two kinds of trading is that since crypto spot markets are perpetual, traders themselves must determine how long they wish to hold on to their positions with leveraged funds. While on the other hand, futures typically have a fixed expiry date that determines how long you can hold on to that position.

Read more: Futures Trading on CoinDCX Pro

RISKS: MARGIN vs FUTURES TRADING

<need individual heading here> Risks in Margin & Risk in Futures

Risks in Margin Trading

There are a few risks associated with margin trading, some of which tend to be common with futures, while some others are unique. The common risk associated with margin trading and futures trading is that both essentially use a form of leverage to be able to take trades worth more than the capital invested. Hence, while the profit potential is more than the usual trade, the downside risk is also equally higher.

Another risk which is unique to margin trading is its tax implications, especially in India. Since margin trading happens directly on the spot market, where a trader is actually purchasing cryptos or ‘virtual digital assets’ – the 1% TDS or tax deducted at source regulations apply here.

Risks in Futures Trading

As mentioned earlier, since both use a form of leverage to speculate in the market – the common risk in futures trading too is the fact that one can use the leverage to increase profit potential, but the downside risk also happens to be higher. To further add to that, since futures trading allows for 100% leverage option, there is a chance of a complete wipeout of a trader’s capital if the trade goes in the wrong way.

CoinDCX Futures Trading

CoinDCX now offers its users the ability to trade in the futures markets to maximise their earnings out of the crypto market. On the CoinDCX pro app, users can participate in the global crypto futures markets which offer high liquidity and lower slippage costs and thus the most useful for active traders today!

Read more about What Makes Crypto Futures Trading on CoinDCX Pro The Next BIG Thing!

FAQs